So Long, Sirius XM

Several sources are reporting that Sirius XM Radio is on the precipice (see Sirius XM Prepares for Bankruptcy or Satellite Radio a Bad Business Model). This is not surprising news, as both Sirius and XM had been on the ropes predating their merger. As the New York Times reports:

Sirius XM…has hired advisers to prepare for a possible bankruptcy filing, people involved in the process said.

Sirius XM, which never turned a profit when both companies were independent, is laden with $3.25 billion in debt. Its business model has been dependent, in part, on the ability to roll over its enormous debts…at low rates for the foreseeable future until it could turn a profit.

MY COMMENT: Excessive debt was not unique to Sirius XM. It is an economy-wide epidemic. Expect to see many more bankruptcy stories with a similar plot as the year goes on (see my posts Notable Bankruptcies or Corporate Defaults).

Sirius XM hired Joseph A. Bondi of Alvarez & Marsal and Mark J. Thompson, a bankruptcy lawyer with Simpson, Thacher & Bartlett, to help prepare a Chapter 11 filing, these people said.

Documents and analysis are close to completion and a filing could come in days, according to a person familiar with the matter.

According to MarketWatch:

Sirius XM Radio, which reportedly is on the verge of declaring bankruptcy, has problems that go far beyond the dismal state of the economy.

The idea of charging consumers a modest fee in return for superior programming and sterling reception quality may not be viable. Perhaps the industry’s entire business model was flawed from the start and the nation had to experience this devastating recession before people reached that conclusion.

The Wall Street Journal reported on Wednesday that satellite mogul Charles Ergen of Dish Network Corp. has offered to restructure Sirius’ debt and inject several hundreds of millions of funding into the company if it will yield control to him.

I’ve blogged about Sirius Satellite Radio on several occasions (see Sirius-XM Merger, Sirius-XM Merger Update, or Lessons for Sirius for background). It was my opinion that the deal made a great deal of strategic sense. I wrote:

…there are some real cost saving opportunities to this merger. The synergies are real and tangible. Not only do the firms have the ability to economize on administrative costs (e.g., why do we need two sets of management to run these firms), but there are some obvious synergies in production (e.g., why do we need two sets of alternative rock stations when one will suffice).

…it [also] adds value for customers. Exclusivity contracts negotiated by these separate firms locked-in consumers. For example, fans of Major League Baseball were forced to choose XM while fans of Howard Stern only had Sirius as an option. Combining the firms allows fans of both to resolve issues of which service to choose…consumers who have chosen to wait for the uncertainty to resolve over which service would become the standard because they did not like having to choose between two options that are second-best (e.g., I want both Howard Stern and MLB, but I won’t choose until things get resolved) will no longer have to agonize over the decision of which service to select. With Sirius and XM merged…more consumers will likely opt for satellite radio.

Irrespective of today’s news, I still believe the deal makes sense, for as independent entities, Sirius and XM would be far worse off.

In addition, I argued at the time that the DOJ and the FCC were barking up the wrong tree by trying to prevent their union on the grounds that the deal was anti-competitive.

…they [Sirius/XM] do face substantial competition, not in the form of competitors in their existing space, but in the form of substitutes. They face threats from HD radio, traditional radio, iPod connectivity, internet streaming, etc. So this…will put a ceiling on their pricing power.

The initial DOJ and FCC objections now seem misguided, as Sirius XM certainly was not able to flex its pricing muscle, especially in a market in which consumers have a bevy of alternatives, in an economy mired in recession, and in an environment in which auto sales have fallen off a cliff.

Despite all its difficulties, I still believe that Sirius XM has a fighting chance. But the road ahead will not be an easy one, even with a debt reset. Sirius XM still faces the daunting task of convincing consumers that it offers a fairly priced service that provides value vis-a-vis its competitors. And as the MarketWatch article aptly concludes:

Hopefully Ergen — or someone else — can find a miracle cure for an industry that threatens to vanish right before our eyes.

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6 Responses to So Long, Sirius XM

  1. SteveM says:

    I don’t know what Sirius/XM’s books look like. As noted in your commentary, mergers work because redundant overhead can be eliminated and product lines consolidated.

    But how much of the Sirius/XM problem is really paying for and maintaining 2 separate satellite constellations versus everything else? If the cost of hardware plus debt to finance its placement as well as system operating costs swamp savings from (cheap) programming and combining HR, they go broke.

    So simple arithmetic. Does the savings potential dominate the cost drivers of the enormous expensive systems themselves?

    P.S. DJ’s are a dime a dozen. Howard Stern is the only programming cost that probably gives them heartburn

  2. Good point Steve! I’m not sure what the costs are to maintain the satellite network, and/or whether there is the potential to benefit from large cost savings by paring down to one network versus two.

    Would definitely be interesting to get some color into those costs…

  3. SteveM says:

    Robert,

    Thanks for your reply. My thinking is not only the high placement cost of the satellites but the unique fact that they may have no salvage value if they can’t be sold for another application, e.g. Iridium.

    So in other words, even if Sirius/XM abandons a number of satellites, it’s not like selling a terrestrial property and getting at least something for it. That money is just gone…

  4. Yes, that sounds about right Steve.

    I read somewhere that XM had two Boeing satellites and Sirius had three Loral satellites. That might not be exact, but that is what I remember reading. The question then becomes what to do with the superfluous satellites.

    You’re right that they probably don’t need all that physical equipment anymore, and I don’t know the market for satellites very well, so I cannot assess whether they have value outside their current use. But even if they cannot be sold; they are sunk costs in the economic sense. The huge up front, one-time costs have largely already been spent. If that is the case, there is little savings outside of the additional operation and maintenance costs of the constellation that they have chosen to abandon.

  5. SteveM says:

    Robert,

    Right. So if the marginal cost of producing a hour of programming is low (excepting Howard Stern), how are they losing money? I mean most of the programming is simply organizing play lists on a computer.

    I think Sirius has about 10 million subscribers. The basic subscription rate is $13 a month. $130 million a month in revenue is a lot of money in the context of just putting play lists together and paying for some talk show access.

    If actually operating the satellite constellation is the major cost driver, then the concept just won’t work. However if it’s debt service for launching and emplacing the equipment that is the cost driver then Sirius would be a cash cow when the debt is repaid.

    So if there is a big debt load, no one will buy Sirius now. Especially if you toss the Stern contract on top of that. Better to let Sirius clear the books either through bankruptcy or by limping along cash crippled and then go after the future revenues. Maybe make a play 12 months before the final debt tranche when the balance sheet still stinks and the market is still wary.

  6. Maybe Steve,

    But their problem is two-fold:

    1. Too much debt – but as you point out they could always go bankrupt and get a debt reset, thereby capitalizing on possible future revenues unencumbered by their current debt. But that does not necessarily make them viable because:

    2. Competition from alternative formats – it is unclear that they will continue to have subscribers and a revenue base in the face of competition from HD Radio, Internet streaming, IPods, decreasing sales of autos etc.

    My guess is that much of their subscriber base is comprised of those who have purchased new cars with the free “trial” subscription. In order to keep those subscription numbers up, they need churn – new car sales need to offset losses in subscribers who do not renew after trial runs out. Well, car sales have fallen off a cliff. So it’s not at all clear that their subscription rate will grow (or even remain static). It’s no surprise to me therefore that Sirius XM has been reticent to release subscriber numbers recently.

Posted in Bankruptcies, Business Strategy, Corporate Strategy | 6 Comments